The JOBS Act and the changes to Regulation D of that Act initiated some important changes to the private securities offerings market. Rule 506(c), implemented in September 2013, allowed issuers to advertise their offerings publicly and unhindered in various forms of media. General solicitation in connection with Rule 506(c) opened up access to a new group of investors, even though accredited investors were the only ones qualified for these sales.
Lack of General Solicitation Offerings
The landscape of unregistered offerings Regulation D more than four years later has not changed much from how it was prior to 2013. Most issuers have chosen to raise capital under Rule 506(b) which excludes general solicitation instead of utilizing the 506(c) exemption.
Rule 506(b) Provides an Easier Process for Many
The question may be asked as to why issuers have not utilized Rule 506(c) much to raise capital, and have rather depended on Rule 506(b). Familiarity is one important reason. It offers a familiar and comfortable process for issuers. As well, the pool of potential investors is familiar to these issuers. Rule 506(b) allows issuers to sell to an unlimited number of accredited investors and as many as 35 non-accredited investors who match specific sophistication requirements. This rule does not require issuers to take active steps in verifying their investors to the accredited investor standard. They can simply rely on the self-certification of investors through a questionnaire, and reasonably believe, based on those answers, that the investors are eligible.
However, when operating under the 506(c) Rule, simply having a reasonable belief that the investor is accredited is not enough. The issuer, instead, must proceed with reasonable steps to verify the investor qualifies according to specific requirements indicating accredited investor status. There are no self-certification questionnaires allowed under 506(c). Instead, the eligibility of investors may be confirmed through particular steps outlined in the Rule – these include reviewing credit reports, tax documents, or written confirmations from specified professionals. There is a significant difference between the requirements of 506(b) and 506(c). As well, lack of general solicitation under 506(b) does not seem to deter its use to a significant degree.
The existing accredited investor pool is familiar to issuers. The fact that Rule 506(c) does not open up a new group of investors to issuers and also has more complicated requirements than Rule 506(b), may be deterring issuers from operating under 506(c).